Superannuation cap 2023: case study

How will the new proposed $3 million superannuation contribution cap impact you?

We recently published an article, ‘’What you need to know about the 3 Million Dollar Super Contribution Cap 2023“, where we explained the reasoning behind the new changes and what it will mean for your future finances. But this article introduces a case study to delve deeper into the real effects Aussies will feel and see, if the proposal goes ahead.

Please note the intricacies of super can vary greatly depending on personal circumstances. That’s why personalised guidance is essential – get in touch for an in-depth evaluation and plan individual to you.

2023 super cap

Proposed in 2023, the $3m total superannuation tax concession cap will impact the taxation of earnings within different accounts. If your superannuation balance exceeds $3m, the balance above that will attract an additional 15% tax on both growth and income. Whilst the $3m cap includes the money held within a pension account, the earnings will remain tax-free on the money you have in a pension account.

$3 million super cap: recap

A few years ago, the government introduced a limit on how much money you can have in a tax-free pension. This is called the transfer balance cap, which has just been indexed this year. If you haven’t used your balance cap previously, you can have up to $1.9 million in a tax-free pension.

Super concessional cap 2023: case study

Meet Jessica, she has$1.9 million in her tax-free pension and an accumulation account with more than $2.1 million. The accumulation account earnings are taxed at 15%. In total, Jessica has $4 million in accumulation 2.1 million paying tax on earnings + 1.9 million tax-free) and because, her total is over the $3 million threshold, she will be taxed an additional 15% on the earnings.

Please note: The proposed way the additional tax is calculated is through a very rough calculation method.  By using the balance at the start of the financial year and then the balance at the end of the financial year (and accounting for any withdrawals and contributions), the additional 15% tax is applied to the difference between the 2 values. This would mean unrealised growth will have tax applied to it.

Issues around that the $3million cap…

If Jessica’s $2.1 million is a self-managed super fund (SMSF), and all that money is in unlisted property, e.g., commercial property, then the SMSF may have to pay additional tax on capital growth that may not be available in liquid assets. It may become very difficult to hold a single, large unlisted asset as tax can be payable on unrealised capital gains.

Also, the cap is an individual cap, so if Jessica has a spouse, she could work towards splitting up superannuation balances so both parties don’t exceed the $3m cap.

Unless Jessica is still working and earning a lot of money in her own name, or has a lot of assets outside of superannuation, it may be beneficial for her to invest that money outside of superannuation in her own name.  With access to 50% CGT discount with investments held personally and the fact that we don’t pay tax on unrealised gains, you really need to consider if balances above $3M inside superannuation would be worthwhile.

Stage 3 tax cuts

Now let’s look at when the stage 3 tax cuts come in. If Jessica has a taxable income up to $200,000, her marginal tax rate is 30%, so she won’t be any worse off having her money outside of superannuation.

In this case, if Jessica has no other taxable income or assets outside super, it could be best for her to take that money outside of super and put it in her own name.

On the other hand, if Jessica has other assets such as business and property asset investments that are generating significant taxable income (e.g, she is still working), then keeping her money in super and paying 30% tax might be the best thing for her.

Superannuation cap 2023: case study

It is evident from Jessica’s case study that the situation can become highly intricate and can be influenced by unique circumstances. Therefore, receiving personalised guidance in this matter is crucial.

If the latest proposed legislation will affect your financial future, we highly recommend seeking professional financial advice to devise the most suitable action for you moving forward. Please contact Precision Wealth Management today, and we can assist you.

DISCLAIMER – The information provided in this blog is general and does not consider your individual financial needs or objectives. It does not constitute personal advice. We recommend seeking out professional and independent financial, legal and tax advice which has been designed for your individual situation before acting on any information contained below.